Category Archives: Gallo

Is the wine market saturated? That’s the question a journalist asked me a few weeks ago. The query was provoked by the release of a study of the economic impact of the wine industry in Washington State, which noted that the number of wineries has reached 700+. Lots of wineries hereabouts and in California and the rest of the U.S. Lots of imports, too. Have we reached the limit? Is the market saturated?

Big and Small Cycles in Finance

Well, it is a mistake to think of a market as a sponge that sits there waiting to be filled up. Markets are complicated and adaptable — they are literally living creatures because they are made up of smart, incentive-driven human beings. So their behavior is likely to be more complicated than empty versus full.

Financial markets are a good example. Scale is useful in financial markets, so it is not uncommon for finance to go through periods of consolidation, where the big get bigger and absorb (another sponge reference) the small. At some point you might worry about saturation. But as the big get really big, they always seem to leave gaps behind that smaller financial firms rush to fill. So a cycle of big creating opportunities for the little emerges.

Financial markets cycles are more complicated than this, of course, and sometimes the sponge gets squeezed out in market adjustments, but I think you get the idea. The same dynamic process that seems to be filling the market in some ways is also leaving gaps for new entrepreneurs. It’s an interesting industry to study, but not necessarily a stable one to work in! Finance is a crazy business. Almost as crazy as wine!

Washington Wine Gets Bigger

So what does this have to do with wine? Well, I see some of the same patterns. Here in Washington State, for example, I see some of that consolidation going on right now. Gallo has finally (because it was inevitable) entered the state as a producer, acquiring the venerable Columbia Winery and Covey Run brands. It looks like Gallo will invest heavily to revive and upgrade Columbia’s wines and historic brand. It’s less clear what will happen with Covey Run — some speculate that the brand will disappear but the valuable vineyards and facilities will continue to produce.

Precept Wines is part of the consolidation pattern here in the Pacific Northwest, too. Precept has built and acquired a number of brands over the years — including the recent acquisition of Idaho’s Ste Chapelle — as it has established valuable scale and scope. Ste Michelle Wine Estates is also part of the trend. SMWE recently announced the purchase of O Wines, a maker of Washington Chardonnay. SMWE intends to add a red wine to the O Wines portfolio and take the brand national.

Washington Wine Gets Smaller

At the same time that Washington wine has gotten bigger (and some wine brands are being squeezed out like water from a sponge), it’s very clear that other winemakers are finding opportunities at the opposite extreme of the market. Their wines will succeed (or fail) not so much because of national branding and economies of scale but depending upon how well they can achieve real quality and successfully attract a small but loyal (usually local) following.

I wrote about Mosquito Fleet Winery a couple of months ago. This small Belfair, Washington winery has found a market for its excellent wines. The fact that the wines celebrate local history helps them connect to a particular customer base in a way that big brother wineries probably cannot.

Another local winery — this one only a few blocks from The Wine Economist’s office in Tacoma — is also succeeding in a crowded market by stressing its distinctly local roots. It is called 21 Cellars for the simple reason of its location: in a cellar beneath a medical office on North 21st Street, just a short walk from the University of Puget Sound.

21 Cellars is a two person operation. Philip Coates is the winemaker and Katrina Lange is assistant winemaker. But job titles are essentially meaningless in an artisan operation like this one, where everyone pretty much does everything — and most of it is done by hand. Here’s how the website describes the operation.

Fermenting in small lots with native yeasts, aging in French oak, and bottling unfiltered and unfined allows for highly structured and distinctive wines. Our limited production allows us to give more hands-on attention to each varietal, de-stemming by hand and using unique methods such as whole berry barrel-fermentation for our reds. Every bottle sold has been filled, corked, and waxed by hand, with labels designed by local artists. We are proud to present wines exhibiting creativity and longevity; showcasing the deep, earthy qualities of Washington’s premier vineyards.

Ruthless Exploitation?

21 Cellars’ roots go back to a home winemaking kit that Coates received several years ago. He caught the wine making bug and the rest is history if by “history” you mean lots and lots of hard work, constant learning and experimentation. Coates’s efforts were good enough to impress some picky vineyard owners, who agreed to sell him their fruit. (Reputation is key in wine and no vineyard owner wants his or her name on the label of a mediocre bottle of wine). We tasted the 09 Malbec and 09 Cab made with grapes from the Two Blondes vineyard, for example, which was developed by Chris Camarda for his Andrew Will winery. The wines we tasted were excellent, with real depth and balance.

Production is modest (less than 500 cases per year) with sensible plans to grow in the future. 21 Cellars will get bigger, but not too big. They don’t want to outgrow the niche that they have so successfully begun to fill.

21 Cellars ruthlessly exploits (and that’s a good thing) its small scale, personal approach and local base with the same passion that Gallo and the others exploit large scale and national or global reach. Marketing is community based. 21 Cellars seems to take pride in supporting local causes and events, including the Washington State Historical Museum. The small and local strategy seems to be very effective. Their recent Semillon release sold out in three weeks!

Is the wine market saturated? Well, it is crowded and competitive, that’s for sure. And some wineries and brands are certainly feeling the squeeze. But as in finance, it seems like there is always room for one more on the bus — if there is quality and commitment and if a legitimate local need is met.

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Thanks to Philip and Katrina for showing us around 21 Cellars and telling us their story. Thanks to Sue, Cynthia and Pierre for their work as research assistants for this project.

I always look forward to the week between the Christmas and New Year holidays because that’s when the pace seems to slow down a bit and I can settle in to read The Economist‘s special double issue.

Of particular interest this year is the essay on page 123 called “Tyranny of Choice: You Choose.” The main point is simple, but the implications are quite broad, with particular relevance for today’s wine markets.

Good — Up to a Point

The simple point? Choice is good, but only to a certain degree. Too much choice is, well, too much and can sometimes stop decision-making dead in its tracks. I say that this is a simple point because we have all suffered from the problem of too many options overloading our preference systems. Or am I the only one who sometimes has trouble ordering coffee at Starbucks or a sandwich at Subway?

Government is a good example of this Paradox of Choice. One party rule is notoriously problematic. Multiple parties provide useful competition. But at some point more political choice is really less –particularly less in terms of stability. Fragile, shifting multi-party coalitions mean short governmental half-lives with no one looking after the whole since everyone’s focused on their own tiny slice of the electoral pie.

What makes The Economist article interesting is that it ties together so many elements of this dilemma, from literature to academic research and from potato chips to human reproduction.

Rollerblading Monstromart

Super-abundant choice is a fact of modern life. The Economist suggests that you …

Wheel a trolley down the aisle of any modern Western hypermarket, and the choice of all sorts is dazzling. The average American supermarket now carries 48,750 items, according to the Food Marketing Institute, more than five times the number in 1975. Britain’s Tesco stocks 91 different shampoos, 93 varieties of toothpaste and 115 of household cleaner. Carrefour’s hypermarket in the Paris suburb of Montesson, a hangar-like place filled with everything from mountain bikes to foie gras, is so vast that staff circulate on rollerblades.

One cost of this embarrassment of riches is confusion or, put another way, higher transactions costs. Making a choice means comparing the qualities and value of different options, which is difficult enough when there are only two brands of breakfast cereal, but mighty time-consuming and complicated when there are 200.

The Economist explores several dimensions of this problem, citing a Nobel Prize winning economist (Daniel McFadden), an Italian novelist (Italo Calvino) and cartoon character Marge Simpson!

Expectations have been inflated to such an extent that people think the perfect choice exists, argues Renata Salecl in her book “Choice”. … In one episode of “The Simpsons”, Marge takes Apu shopping in a new supermarket, Monstromart, whose cheery advertising slogan is “where shopping is a baffling ordeal”. “How is it”, muses Ms Salecl, “that in the developed world this increase in choice, through which we can supposedly customise our lives and make them perfect leads not to more satisfaction but rather to greater anxiety, and greater feelings of inadequacy and guilt?” A 2010 study by researchers at the University of Bristol found that 47% of respondents thought life was more confusing than it was ten years ago, and 42% reported lying awake at night trying to resolve problems.

Greater choice first delights us, then overwhelms us, then it can sometimes drive us crazy. There must be a “best” among all the rest. Which is it? And how will I know? The quest for the best can sometimes destroy the pleasure of the very good by introducing an unwanted but unshakable sense of doubt.

The Age of Anxiety

Which brings us to wine. It does seem like the problems of exaggerated choice apply especially to wine. Of those 48,000 items on the upscale supermarket shelves, chances are that 1500 or more are bottles of wine. Wine is the largest choice space in the modern grocery store, ten times richer in terms of the number of options than the #2 area (breakfast cereals) and much more complex.

Wine buyers have never had it better in terms of the number of choices available from around the world. And we’ve never had it worse regarding the possibility of confusion and the pressure to find our perfect wine. It’s the Age of Anxiety for wine.

I find it interesting that some of the hottest products in the wine market seem to simplify wine just a bit and perhaps unintentionally address this anxiety. Gallo’s inexpensive Barefoot brand wines have very done well in the last few years; most people view this as a price thing — the result of trading down. But Barefoot also offers consumers a more casual idea of wine that would appeal to anyone who wants to get out of “perfection” rat race and just enjoy wine without over-thinking it. (And every Barefoot bottle features a “Gold Medal” from a wine competition, giving buyers the security of a sense of quality.)

The hottest wine sectors today are Marlborough Sauvignon Blanc and Argentinean Malbec; is it a coincidence that these wines are easy to understand, with many good producers at various price points? The problem of choice still exists for buyers of these wines, of course, but perhaps more of the pleasure of choosing survives.

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Several people have asked about the series on BRIC wines. Fear not — it will resume in a few days with a report on Russia,

I thought it would be interesting to take a look at what’s “big” in the wine market (where the most consumer dollars are going) versus what’s “hot” (or “hot hot hot” as in the video above), showing the fastest growth. I’m using U.S. off-premises wine sales data from Nielsen for the 52 weeks ending 9/18/2010 taken from the December 2010 issue of Wine Business Monthly.

Baseline information: Off-premises wine sales in the U.S. totaled $9,172 million in the period covered here according to the Nielsen report, with an overall growth rate of 3.2%.

Which product categories are the largest in absolute terms and which are growing the fastest? I’m going to break down the data by wine varietal, country of origin (for imported wines) and price category. Take a minute and write down what wines/countries/price points you think will be at the top in each category and see if you’re right. Here goes

Chardonnay Leads the Way

Forget what you thought you knew about Chardonnay being so yesterday and Pinot Noir kicking Merlot’s butt. In terms of the overall retail market sales, the giants (or are they dinosaurs?) still dominate.

BIG varietals

Varietal

$ million

Chardonnay

$1,996

Cabernet Sauvignon

$1,347

Merlot

$911

Pinot Gris/Grigio

$734

Pinot Noir

$526

White Zinfandel

$427

–

American wine drinkers are nothing if not traditional, reaching again and again for familiar varietals, so the usual suspects come top of the table. Pinot Noir has indeed surged in the post-Sideways era, but its lead over wounded White Zin is not large and it still lags far behind arch nemesis Merlot.

Obvious Chardonnay is the consumer default with a 50% lead on Cabernet and double the sales of Merlot. Pinot Grigio, the #2 white varietal, lags far behind.

I find the varietal “hot list” below quite interesting. The fastest growing wine varietals are Riesling, Pinot Noir (of course), Sangiovese and Sauvignon Blanc. (Interestingly, varietal Sangiovese is rising while Chianti is a shrinking category in the Nielsen league table.)

HOT varietals

Varietal

Increase

Riesling

9.4%

Pinot Noir

8.9%

Sangiovese

8.7%

Sauvignon Blanc

8.5%

-

It seems to me that while the “big” varietals are wines that many consumers purchase to drink on their own (because of their high alcohol levels and for other reasons), the “hot varietals” are a bit more likely to be food wines. I wonder if that’s a trend?

World Wine Web

Most of the table wines that Americans drink are American — there is a very strong home country preference. Domestic wine sales totaled $6,524 million for the period covered here while imports accounted for $2,648 million. What countries supply the most imported wine as measured by total expenditures? Here’s the Big list:

BIG import countries

Country of Origin

$ million

Italy

$804

Australia

$771

Chile

$243

France

$228

Argentina

$187

New Zealand

$125

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As the table shows, Italy and Australia are #1 and #2 respectively in off-premises sales. It is interesting that France has fallen to #4 behind Chile. Argentina and New Zealand make the cut here (Spain did not!) as you might expect, but bear in mind that Italy still sells more wine in the U.S. than Chile, France, Argentina and the Kiwis combined. The concentration ratio in this market is very high: Italy and Australia may be struggling at the moment, but they are in a league of their own.

Italy and Australia will not be over-taken soon, but the market momentum seems to have has passed. Look at the big growth numbers that Argentina and New Zealand are putting up below! Wow. Annual growth rates of more than 20%!

HOT import countries

Country of Origin

Increase

Argentina

27.6%

New Zealand

21.1%

Germany

4.4%

Chile

1.7%

Spain

0.6%

Portugal

0.3%

-

Now look at the gap between the really hot ones and the rest! Germany comes in at #3 on hot list, but with a low 4.4% increase for the year. Sales of most wine imports (including Italy and Australia) have actually fallen in the last year. Spain and Portugal squeeze onto the list at #5 and #6 by simply avoiding utter collapse. The import wine segment is slumping badly, with Argentina and New Zealand the only significant exceptions.

The Price is Right

Finally, let’s look at the market in terms of price points. What are the biggest and hottest parts of the wine wall in terms of price?

BIG price points

Price Segment

$ million

$3.00 – $5.99

$2,688

$6.00 – $8.99

$1,903

$9.00 – $11.99

$1,868

$12.00 – $14.99

$910

$0 – $2.99

$794

$15.00 – $19.99

$557

$20+

$446

–

You can see from the data why Gallo is having a good year (or probably having a good year, since they are a private company and don’t release data so I can only guess). Their brand portfolio is aimed at the heart of the market, from $3.00 to $11.99. Lots of good targets there!

You can also see why Constellation Brands is probably finding this a challenging year. They reconfigured their brand portfolio to take advantage of what they saw as upmarket opportunities. They moved up the wine wall a bit but the market changed directions and went downmarket, leaving them in a less competitive position.

HOT price points

Price segment

Increase

$9.00 – $11.99

9.1%

$20+

7.4%

$12.00 – $14.99

5.0%

$3.00 – $5.99

4.5%

$15.00 – $19.99

2.5%

$0 – $2.99

(0.1)%

$6.00 – $8.99

(4.0)%

–

But Constellation’s upmarket bet may yet pay off. The hot price segments are all in the wine wall’s upper strata.

The Old Elasticity Trap

The rise in spending in the super-premium + categories is an encouraging sign, but I think some caution is necessary in interpreting the data. Many observers see the big increase in expenditures on $20+ wines and conclude that consumers are coming back to this segment strongly — that the demand curve has shifted. But I suspect that there is a lot of bargain hunting taking place and that margins are falling – bad news. Maybe we are just following discounted prices down the demand curve.

For many of today’s buyers a $20+ retail wine is a highly discretionary purchase and so the demand curve may be quite elastic. Econ 101 students will remember that total expenditure increases when price falls for a product with an elastic demand.

The large percentage expenditure increases we seen in the data could result from discounting — $30 wines being sold off for $25 and so on — rather than an actual increase in demand or shift in the demand curve. The increased revenues are good and inspire optimism, but they may disguise the bad news of shrinking margins.

(As I am writing this, the neighborhood Safeway is offering an extra 20% off any wine selling for $20 or more. I suspect sales revenue will increase at the lower retail markup.)

Overall conclusions? I’d rather not, thanks. These data are interesting more for the questions they raise than the answers they provide. But the questions about how the U.S. wine market is changing are worth pondering (hopefully over a nice glass of wine). Cheers.

Bottlenecks are always problematic. It seems like they are always too narrow or not narrow enough.

We ran into an unusual bottleneck last week when were went to Wenatchee to help our friends Mike and Karen Wade bottle the 2008 vintage at the Fielding Hills Winery. FHW is award winning 800-case operation and the bottling is done by a volunteer crew of friends, family and wine club members. I wrote about it in one of my first blog posts, comparing the wine bottle assembly line to Adam Smith’s famous pin factory.

Bottleneck Bottleneck

The division of labor does improve efficiency, just as Smith said, but anyone who’s worked an assembly line knows about bottlenecks – the whole process only moves as fast as the slowest work station. If the corker is slow, for example, nothing else will go very fast. (The corker was no slacker on our shift – John Sosnowy of the Wine Peeps blog.)

Our crew worked very well, but there was still a bottleneck, albeit an invisible one. The capsules that fit over the bottle’s neck hadn’t arrive (a bottleneck bottleneck!) – they were held up somewhere in customs in a container that must contain hundreds of thousands of capsules for many wineries. We bottled the wine, but when the capsules finally arrive it will be necessary to open each of the 800 cases, pull out every bottle, affix the capsule, return and reseal. That’s about 10,000 bottles. What a headache! I hate bottlenecks.

The biggest bottleneck in the American wine business, of course, is distribution. With 51 different sets of state rules and regulations and the three-tier winery/distributor/retailer/consumer system, it sometimes seems like making wine is the easy part – getting it to customers is the bigger problem. Widening the distribution bottleneck seems to me to be a key to expanding the wine market and building a more robust American wine culture.

Tightening the Distribution Bottleneck

The Obama administration seems to want to build up the U.S. wine industry – that’s why he sent Commerce Secretary Gary Locke to Hong Kong to sign an agreement to ease the wine export process and open that bottleneck a bit.

But Congress is moving in the opposite direction. Wine Spectator reports that more than 100 members of Congress have announced support for H.R. 5034, a bill that would further restrict direct wine sales in American. It would make it (even) harder to ship wine across state lines. Wine Spectator reports that wine distributors (who benefit from their key position in the three tier bottleneck) actively support the bill.

The supporters of H.R. 5034 argue that direct shipping undercuts the power of states to regulate alcohol distribution and sales, and I understand this logic. But the winery owners I know actually go to extremes to satisfy state regulations because the penalties for making a mistake are often extremely onerous. (I know one winery that has stopped all interstate sales for now because of compliance concerns.)

Focus on Direct Sales

The slack economy has put direct sales in the spotlight. With wine sales down in many categories and price points still eroding, wineries are trying to boost the yield per bottle and increasing direct sales and reducing the flow that goes through distributors is one way to do that. Isenhower Cellars in Walla Walla has actually reorganized itself (and opened an off-site tasting room) so that it can rely entirely on direct sales. Their website announced that

Isenhower Cellars is no longer selling wine to restaurants, wine shops, or grocery outlets in Washington State. Our wines are now exclusively available from the winery in Walla Walla, Washington, our tasting room in Woodinville, Washington, or here on our web site. We treasure the past relationships with our Washington State distributors and friends in the wine trade. However a complete focus on quality limits production to 2,000 cases of wine and the success of our wine club and second tasting room leaves no extra Isenhower wines available for sale outside of our winery’s embrace.

Even E&J Gallo, which has done quite well thank you during the recession, is trying to increase direct sales. I’m on a couple of email lists for Gallo wine brands that I follow and they frequently offer nice discounts or low cost shipping to try to encourage orders from their online wine shop, The Barrel Room.

It seems inconsistent to send Gary Locke to China to expand wine exports and then discourage the equivalent interstate trade. As an economist, I am naturally biased toward more choice and freer trade. I hope the attempt to tighten the wine shipping bottleneck gets caught in some legislative bottleneck somewhere down the line and never reaches President Obama’s desk.

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Thanks to Karen, Mike and Robin Wade for their hospitality and great wine. Thanks to the members of the 2008 FHW Cabernet Franc bottling crew both a fun and productive afternoon.

Many people have written to me over the years expressing their dismay at the sorry state of restaurant wine. Usually they complain about high restaurant prices and ask how they can possibly be justified. They are seldom satisfied with my answer — restaurants charge high prices because people will pay them. Now, however, the critique has shifted to the wines themselves and what they reveal about wine in America.

What Does American Really Drink?

My recent post on “Olive Garden and the Future of American Wine” (see previous post) seemed to catch many wine enthusiasts by surprise. It reported data from Restaurant Wine magazine for the best-selling wines in American restaurants as determined by distributor “on-premises” shipments. This data, based on volumes shipped to all “on-premises” establishments in 2008, reveals that when America goes out it drinks a lot of White Zinfandel, Pinot Grigio and (gasp!) “Chablis.” Only one red wine made the top 20 list: Yellow Tail Shiraz.

The list changes only a little if we look at the data for wine brands (as opposed to specific wines):

Kendall-Jackson

Sutter Home

Beringer Vineyards

Franzia Winetaps

Inglenook

Yellow Tail

Copper Ridge

Cavit

Woodbridge

Salmon Creek (Bronco)

The complete list of the top 20 brands is dominated by America’s three largest wine companies with three brands each from Constellation Brands (Woodbridge, Taylor California Cellars and La Terre), Gallo (Copper Ridge, Barefoot Cellars and Ecco Domani) and The Wine Group (Franzia, Inglenook and Almaden). These three giants have large brand portfolios and strong distribution machines. They get their wines into every nook and cranny, both retail and on-premises sales. You can see the results virtually everywhere.

Only 4 of top 20 are international brands (Yellow Tail, Cavit, Ecco Domani and Mezzacorona). I think the fact that three of these four are Italian wine brands says something about the importance of Italian restaurants, including especially Olive Garden, in the American wine market.

Another Picture: The Wine & Spirit Rankings

The Restaurant Wine data give us one picture of the market, Wine & Spiritsmagazine’s annual restaurant report (April 2009 issue) provides a different (and perhaps more comforting) image. W&S asks a group of wine-focused restaurants to report which wines are on their lists — now how much they sell, but which ones are on offer. Since wines don’t stay on lists long if they don’t sell, this is an indirect measure of availability and popularity, although it isn’t the same as as volume rankings. Here is the W&S top 10 for 2008.

Sonoma-Cutrer Vineyards

Cakebread Cellars

Jordan Vineyard & Winery

Silver Oak Wine Cellars

Ferrari-Carano Winery

Robert Mondavi Winery

Veuve Cliquot

Chateau Ste. Michelle

Rombauer Vineyards

Kendall-Jackson Vineyards

Sonoma-Cutrer is #1 on this list, yet it appeared on only about 14% of the surveyed wine lists (and, as noted above, there is no indication of how much was sold). Only one winery appears in both top 10 lists – Kendall-Jackson. Only two other wineries appears in both top 20s – Beringer and Chateau Ste. Michelle. Gallo and The Wine Group are missing from the W&S top 20, although Constellation Brands makes the list through Robert Mondavi.

Looking over the data, I find myself especially impressed by the performance of Kendall-Jackson and Chateau Ste. Michelle. Both makers seem to combine wide distribution with a range of wines at attractive price points. It isn’t surprising that they rank high on both lists. Perhaps other producers will try to emulate K-J and CSM, especially given this tough economic climate.

Good, Bad or Ugly?

If the first list of restaurant wine brands depresses you, then ignore it and focus on the second list, where White Zin is much harder to find, but don’t get too smug. Remember that there are many markets for wine and that the US is no different from other countries in this regard. Compared to Germany, in fact, much more fine wine is sold here and proportionately less of the bulk product.

For myself, I see a glass half full. My experience working with college students who study wine is that the inexpensive wines serve a really useful function of introducing students to wine and diverting them from beverages that are more closely associated with binge drinking.

Although some White Zin drinkers suffer from arrested development and never move beyond it, I am persuaded that many do. Every staircase, no matter how high it reaches, needs a bottom step. We have a broad first step in America — no surprise there — but I think it is a step up.

We live in the age of Celebrity. People are celebrated for their achievements in sports, politics and the arts. Some people are even celebrated for their lack of achievement — famous for being famous, as the saying goes. I won’t name names, but you know what I mean. Celebrities are everyone — in the news, on TV and all around us through ads and product endorsements.

People Magazine’s Wine

Lil Jon, Celebrity Winemaker

So we shouldn’t be surprised that there are celebrity wines, too. Some wines simply use a celebrity name as a marketing tool. I think the Martha Stewart label falls into this category (the wine is made by Gallo). Other celebrity wines are more than just marketing projects (although having a famous name doesn’t hurt). The Fess Parker and Francis Ford Coppola wines come to mind here.

Celebrity wines are hot, or at least that’s what the indicators say. People magazine features an article on celebrity wines in their November 10, 2008 issue. People asked Gary Vaynerchuck, a celebrity wine critic, to rate the wines of four celebrity wine makers. Hip-hop artist Lil Jon’s Little Jonathan Winery Chardonnay ($15.99) scored a solid 89 points. Sopranos star Lorraine Bracco’s Italian-made Pinot Grigio ($11.99) earned an 86+ rating. Mötley Crüe rocker Vince Neil’s $9 Petite Sirah is an 88-point good buy, Gary says. And the $20 Victory Rosé from Olympic figure skater Peggy Fleming’s winery, Fleming-Jenkins, received 87 points. (Fleming donates $2 to breast cancer research for each bottle of this pink wine she sells — a use of celebrity clout that is difficult to criticize.)

The Nielsen Report

Maybe you aren’t entirely comfortable taking wine recommendations (or wine market analysis) from the pages of People magazine. If so, then a study released by The Nielsen Company (market research experts) might interest you.

The Nielsen data, which do not reflect the impact of the current economic crisis, indicate that grocery store sales of celebrity wine grew by nearly 19 percent in 2007, albeit from a low base (the celebrity wine category is still a small market segment — less than one percent).

The average price of the celebrity wines, $8.50, is higher than the supermarket average of $5.75, according to Nielsen. Unsurprisingly, the Nielsen report focuses on marketing and distribution (not the quality of the wines themselves) as the key factors driving sales growth.

“Several factors are fueling the growth of celebrity wines,” said Hurst. “First, existing brands are expanding and gaining new distribution through new line extensions. Second, more celebrities have launched their own brands in the past year or have had suppliers launch products under their names. As these brands have proven themselves, they’ve gained distribution in other retail outlets, which has further stimulated growth. And third, savvy marketers leverage the ‘celebrity’ benefit into expanded marketing programs via in-store vehicles, outdoor events and traditional and online media.”

Celebrity Wine Myths

Like the “critter wines” that they superficially resemble, celebrity wines are associated with a number of myths that should be briefly considered.

Myth #1:Celebrity wines are an American phenomenon. Alas, no. One of the most famous celebrity winemakers is the French actor Gerard Depardieu, who now owns vineyards in Bordeaux, Languedoc, Spain, Morocco and Argentina in partnership with wine tycoon Bernard Magrez. Ernie Els, the South African golfer, has a line of wines from his home country, following the example set by Australian Greg Norman. New Zealand actor Sam Neil has an estate in Central Otago.

Myth #2: Celebrity wines are bad wines. No again, although I admit I haven’t tried very many of them. The studies I have found suggest that celebrity wines are just like wines generally, you can find examples that are good, bad and maybe even a few that are ugly (hey — good, bad, ugly — that would make a great name for a line of Clint Eastwood wines!). Because celebrities have an incentive to protect their personal “brands,” I suspect they try to avoid associating their names with really foul products. At least some of the celebrity winemakers take a real personal interest in their products, which is likely to make a difference in quality.

Some celebrity wines are excellent, which is easy to understand. Celebrity is a powerful force in today’s world and celebrity winemakers can often leverage their fame through connections and associations that contribute to wine quality. You know what I mean — privileged access to quality grapes, personal advice from talented professionals, and so forth. Football hero Drew Bledsoe is opening a winery called Doubleback in Wallla Walla, his hometown. I think he is bound to make good wine because so many wine professionals have taken an interest in it. Wine people, even prominent ones, are only human and like to be associated with heroes and to participate in their projects. The wine can’t help but benefit form this attention.

Myth #3: Celebrity wines are bad for the wine business. Celebrity brands draw attention away from “real wine,” this argument goes, and only cheapen and commodify the idea of wine. There is obviously some truth to this, especially if we consider multi-product lifestyle brands that have expanded to include a wine component in their portfolios– Martha Stewart, for example, and Sir Richard Branson’s Virgin empire. It seems to me that these associations diminish wine as a distinct product by reducing it to “just another” Martha S or Virgin label.

But most celebrity wines that I’ve seen don’t fit this mold and create a different kind of celebrity association. These products may benefit the wine market by attracting new customers and encouraging wine drinkers to try new types of wine. They also probably distort the market a bit, making it marginally more difficult for non-celebrity wines to get distribution in some market segments. On balance, the influence of celebrities is probably positive since they draw public attention to wine. Even the readers of People now know a little more about wine thanks to the Lil Jon piece.

The Future of Celebrity Wine

Prediction is difficult, economists like to say, especially about the future. But I’ll hazard a guess about the future of celebrity wine. As a category of wines I think celebrity wine will remain a small but vital niche. Wine is part of society, so why should wine be excluded from the celebrity effect?

Some celebrity wines will thrive, but I don’t think it will be because of a famous name. In the long run I believe that the quality of the wine is what matters. I cite Fess Parker as evidence in this regard. The wines are very good and speak for themselves. The Fess Parker name and Davey Crockett association hardly matters after you’ve pulled the cork.

But most celebrity wines will rise and fall in sync with the notorious name on the label. Celebrity itself tends to be fleeting and I suspect that most celebrity wines will be here today and gone tomorrow, replaced by someone and something new. Fame’s famous quarter hour passes quickly these days as the media moves on to tomorrow’s headline and a new People profile appears.

[Note: Special thanks to Emily Gordon for bringing the People article to my attention.]

I’ve written before about the British wine market, the most important marketplace in the world of wine. Everyone wants a place on Britain’s Wine Wall, but breaking in isn’t easy to do, as a recent Decanter article and a conversation with one of my former students makes clear.

Decanter Discovers Washington Wine.

Many Washington winemakers are keen to try to get their feet in the door of European markets. They figure that the time is right: the dollar is cheap and their wines are excellent. They cannot help but be pleased, therefore, with the July 2008 issue of Decanter magazine, which features an article about Washington wine by regional wine critic Paul Gregutt. Three pages of text, maps, photos and wine reviews – it’s a nice package. Several of the wineries mentioned even backed up the effort with two pages of advertising. A really good display for Washington wines in the world’s most influential wine magazine.

But there’s a problem. British buyers know about these great wines now (more than ten wineries are mentioned including Columbia Crest, Seven Hills, L’Ecole 41 and Reininger), but only one (Columbia Crest) has current British distribution. Want one of the other nine? Call the winery in Washington State, the Decanter listing says. You’ve got to wonder how many buyers will do this and how many will just turn the page to the next New World wine – one that is actually available in Britain. You need publicity to get distribution, I know, but publicity without distribution doesn’t make the cash register ring.

On a different note, I have to wonder about the quoted price for the Columbia Crest Horse Heaven Hills Chardonnay. Wine Spectator gives it 91 points and lists the price at $15. The British price is apparently £19.53 or about two and a half times as much in dollar terms.! It’s not going to be easy to break into European markets under these circumstances,

When Gallo Went to Europe

Gallo today is a classic American integrated wine multinational. Although it is based in Modesto, in the heart of California’s Central Valley, and the bulk of its business is U.S. market, Gallo has complex international linkages. Gallo sources wine from Italy, France, Australia and New Zealand and sells wine in Europe, Japan, and Latin America. But it wasn’t always that way. Gallo’s was drawn into the global marketplace in the 1980s, attracted by the markets in Britain and Germany.

I asked my former student Steve Emery to tell me what happened when these American wines (and American wine ideas) invaded Europe. Steve is CEO of Earth2O, an Oregon company that bottles and distributes water from pristine Opal Springs near scenic Bend, but in the late 1980s he was Director of Sales for Gallo’s program to establish its varietal wines in England, Ireland and Germany. His experiences say a lot about the nature of global wine then and now and the problems of breaking into new markets.

Getting Gallo into Europe was difficult, Steve told me, although ultimately successful. Even though Gallo is a huge presence at home, it was an unknown quantity abroad. I remember seeing Gallo wines on the shelf of my local wine shop when I taught in England in 1989 and I was surprised at the price point. Gallo wines seemed expensive to me, about the same price as the most popular French and Italian wines on the shelves. I expected Gallo to be a cheaper brand like it was at home. But the advantage of lower price wasn’t really possible in the British market, given such obvious barriers as transportation costs and not-so-obvious hurdles such as the British wine tariff.

Many countries tax wine imports, whether to collect revenue, protect domestic winemakers, or try to shift consumption to other commodities such as local beers and spirits. Britain is not unusual in this regard. What makes Britain different is that the tax is relatively high and levied on a per-bottle basis (and only on non-EU wines, of course). Britain collects more than $2 on each bottle of imported. (£1.29 according to a recent Rabobank report). The flat per-bottle tax has a way of shifting the demand for wine towards more expensive products. A $2 tax on a $2 wine represents a 100 percent tax. For a $4 wine, a $2 tax increases the price to $6, a 50 percent rise. For a $10 wine, the tax raises the price to $12, only a 20% increase. So the tariff falls heaviest on lower price goods and shifts the market upscale towards better or at least more expensive bottles and wines produced in the EU, not the New World. The cost advantage that Gallo enjoyed in the United States was partially offset by the British tariff regime.

But that wasn’t the main problem, Steve told me. The British supermarkets were savvy retailers – some of the wine buyers were highly trained Masters of Wine – the highest designation in wine education. But they were organized to purchase and market wines based on geographic region rather than brand or type of wine. As Steve says, they didn’t think in terms of brands (apart from the obvious fact of their own store brands). This is true even today. If you go into a Marks and Spencer store in Britain, you will find a world of wine available, but the wine is mainly organized and labeled according its place of origin rather than a US-style brand. The wine’s “pedigree” (Friuli D.O.C. Grave Merlot, for example, or Macon Rouge, appellation Macon Rouge contrôlée) is listed in big letters, but the maker’s name and the brand – custom bottled for Marks and Spencer – are tiny by comparison. The wines that Gallo sent to Europe were California wines, a useful geographic designation, but Gallo was the brand that defined the wine, not California.

British wine marketing was also different in other ways. Steve told me that the British weren’t applying the basic Wine 101 lessons he learned with Gallo in the U.S. – lessons about where to put the most profitable wine (right at eye level on the shelf), where to position your target products in a wine cooler (on the right, where most people will look and reach first) and the many strategies of point-of-sale merchandising. They also introduced print advertising to the wine market successfully.

Gallo had to adapt, Steve said, to be successful in the foreign environment, even replacing the practical screw caps on its least expensive wines with more traditional cork closures (creating a shortage of corks in the process).

The German Problem

Germany was even more difficult, Steve said. That’s easy to understand given the focus on bargain basement wines. It doesn’t seem like most German buyers are interested in paying for a brand. Low price seems to be the main factor and cheaper wines were readily available, Steve said, from Germany, Italy and France. The supermarket wine buyers didn’t want to talk to him, Steve said, so Gallo resorted to guerrilla marketing. They got into the stores through the meat department, using a technique called cross-merchandising. They sold the wine as the perfect accompaniment to beef, chicken and fish rather than wine alone. Every meat purchase was therefore a potential wine sale as well. You are probably familiar with cross-merchandising yourself, even if you’ve never heard the work before. It is the process that has placed small displays of wine all over your supermarket, so that you never miss an opportunity to pair up wine with whatever you actually came to buy. The Germans seem to understand cross-marketing very well now. I visited my local Trader Joe’s this morning and found wine everywhere. I think there was probably more wine spread throughout the store than in the wine section itself.

The wine business is very competitive and Gallo found that the “rules of the game” were much different in Europe. Wine is regulated as an alcoholic beverage in the U.S., so every aspect of its sales is subject to federal or state regulation. In Europe, however, Steve said, wine is just another product and the competition is much freer. That’s why he was able to bargain with the meat department managers in Germany rather than go through the wine buyer department.

Gallo was very successful in Britain and in Europe and many other American wine companies have followed them, but that hasn’t eliminated the challenge of breaking into new markets. I wish our Washington winemakers good luck in their well-timed assault on the Old World markets. It’s not going to be easy.

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The Wine Economist

What would you get if you crossed the Wine Spectator, America's best-selling wine magazine, with the Economist, the world's leading business weekly? The answer is this blog, The Wine Economist, which analyzes and interprets today's global wine markets. Staff: Mike Veseth (editor-in-chief) & Sue Veseth (contributing editor).